It doesn’t look like any GSE (housing finance) reform will be taken up in 2013. Partly because the leading contender, the Corker-Warner housing finance “reform” bill is so flawed.
What does Corker-Warner do exactly? It shuts down two enormous mortgage insurance companies (Fannie Mae and Freddie Mac) and creates one gargantuan government insurance company (Federal Mortgage Insurance Corporation). Ah, nationalized mortgage insurance. This is particularly bizarre given that the FHA already exists as a national mortgage insurance agency for mortgages.
We need a Federal mortgage insurance corporation AND a Federal mortgage insurance agency? The private-public partnership between Fannie Mae and Freddie Mac blew up, so Corker-Warner wants to repeat the same mistake.
Think of it this way. It is like Chevrolet’s disastrous Chevy Cavalier (nicknamed by car dealers as the Chevy Cadavarlier). Cadillac rebadged the Cavalier as the “upscale” Cimmaron. Same bad design … with leather!
The problem, of course, is the government guarantee that still resides with Corker-Warner. Whether you call it a government backstop or insurance, it is still a government guarantee. And there is still affordable housing goals (rebadged, of course).
Corker-Warner claims that lenders take a first-loss position protecting the taxpayer. The problem is controlling the size of the first loss stake. Is it 10%, 5% or will they gradually lower it to 0%? There are a lot of interested parties who want the government to take all the risk (just like Fannie Mae and Freddie Mac having no capital).
Bottom line: there are no safeguards in Corker-Warner that limit the powers of Congress to tamper with the new insurance company. The new FHFA Director Mel Watt may very well proceed with unwinding Fannie Mae and Freddie Mac (although they could have kept Ed DeMarco if that was the Administration’s true goal), but what will remain? A too-BIG-to-fail insurance corporation? Who is the new regulator? Who are the insurance company board members? How are they appointed? Etc., etc. We just don’t have enough details.
Mel Watt is allegedly considering reviving the 40 year fixed-rate mortgage in an attempt to lower mortgage payments versus the 30 year fixed-rate mortgage. Of course, this increases the risk of loss to whoever holds the 40 year mortgage. Will they increase the guarantee fee accordingly? Why not just use 5/1 ARMs which also lower the mortgage payment? No, Watt and the affordable housing crowd want fixed-rate mortgages and Uncle Sam to bear the losses.
GSE liabilities were higher than the Federal debt through the housing bubble of the last decade and only slowed after Ed DeMarco became acting FHFA Director. This is a lot of liabilities.
Much like the Cadillac Cimmaron, Corker-Warner rebadges Fannie Mae and Freddie Mac and adorns it with leather seats. But it is still the same old, bad model.
Too bad Ricardo Montalban isn’t still alive. He could do ads for Corker-Warner, complete with soft Corinthian leather.